Does Having Too Much Money Make Us Stupid?

As a science, economics does not always succeed at predicting how humans behave. The discipline assumes a level of rationality, and an ability to process complex information, that far exceeds human capacity. But as a standard for how people ought to behave, economics provides an excellent set of lessons. Consider the economic principle of consistency in financial trade-offs. If you are purchasing an appliance at a chain store, for example, and find out the product you are buying is $50 cheaper at the store across town, rational economic choice would ask you to ponder whether the time and expense and hassle of that cross town trip is worth the $50 in savings. That pondering – that economic decision – should be unchanged regardless whether the appliance you are purchasing will cost you $100 or $1000.

But of course when faced with this scenario, people are not economically or logically consistent. When imagining the purchase of a $100 appliance, far more people report being likely to travel to save $50 (a 50% savings!) than when they are asked to imagine that the original purchase price was $1000, and the $50 reduction feels barely noticeable.

Aren’t people cute? Isn’t inconsistency and sloppy economic reasoning adorable?

You might even wonder whether the people who exhibit this kind of inconsistent behavior simply do not understand the value of time and money. Maybe they don’t have enough economic savvy to think carefully about trade-offs, like this one between time/effort and money.

Or maybe they simply have too much money to bother to be consistent! According to an article by Anuj Shah and colleagues, people’s economic reasoning – their consistency in the face of economic trade-offs – is improved when they are faced with scarcity.   Over a series of scenarios, they found that people with little money to spare proved to be much more consistent in making economic decisions.

Here’s one of their scenarios, a famous one in the behavioral economics literature.

(To read the rest of this article, please visit Forbes.)

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